"Post-Petition Restructuring Support Agreement Survives Challenge in Delaware"

by Skadden, Arps, Slate, Meagher & Flom LLP


The debtors in Indianapolis Downs operated a combined horse racing track and casino in Indiana. They had substantial secured indebtedness: more than $98 million of first lien (first priority), $375 million of second lien and $78 million of third lien debt. The secured debt was held by sophisticated investors, and a group of second lien debt holders organized an ad hoc second lien committee to advance their objectives before the debtors’ Chapter 11 cases commenced.

After struggling to meet their obligations, the debtors failed to make a mandatory interest payment to the second lien debt holders in late 2010. Despite efforts by the debtors, their equity owners, the ad hoc second lien committee and other constituencies to negotiate formal and informal restructuring proposals, prebankruptcy discussions did not produce a consensus. In April 2011, the debtors commenced their bankruptcy cases with the hope of ultimately consummating a comprehensive financial restructuring.

The RSA. After months spent in Chapter 11 litigation on various matters, the debtors and certain of their major constituencies, including the ad hoc second lien committee, were able to formulate an RSA, which outlined a “parallel-path” approach in which the debtors simultaneously would (i) test the market to determine whether an asset sale would generate sufficient funds to ensure creditor support; and (ii) explore a possible recapitalization to be implemented in the event of the market test’s failure. In addition, the RSA included specific financial terms of creditor treatment under each of the parallel paths and set forth a timeframe for the debtors to propose the contemplated plan. Parties to the RSA were subject to certain restrictions, including (i) a prohibition against proposing, supporting or voting for a competing plan of reorganization; and (ii) a requirement that the parties vote in support of a plan complying with the RSA, though creditors retained the right to terminate the RSA for various reasons, including in the event of a material adverse change or a breach of certain representations by the debtors.

Filing and Objections. On April 25, 2012, the RSA was filed with the court immediately after it was executed. On the same date, the debtors filed the plan and a proposed disclosure statement that fully described the RSA. In June 2012, the court approved the disclosure statement. The debtors’ sales effort ultimately resulted in a satisfactory offer for the purchase of substantially all of the debtors’ assets and, in October 2012, the court conducted a combined hearing on approval of the sale and confirmation of the plan (which was predicated on the sale).

Certain equity holders, senior management and creditors objected to the plan’s confirmation. They argued that negotiation and execution of the RSA constituted a wrongful post-petition “solicitation” of votes on the plan prior to court approval of the disclosure statement, violating Sections 1125(g) and 1126(e) of the U.S. Bankruptcy Code.2 They contended that the RSA was an impermissible solicitation and, as such, creditor votes cast in favor of the plan by parties to the RSA should be “designated” (i.e., disregarded and not counted), which would result in the plan lacking sufficient votes. The debtors and other parties to the RSA disagreed, contending that the development and execution of the RSA was not a wrongful solicitation of plan votes before approval of the disclosure statement.

The plan objectors also argued that certain third-party release terms of the plan were impermissible.

The Court’s Decision

Use of Post-Petition RSA. At the confirmation hearing, the plan objectors contended that the votes cast by the parties to the RSA were invalid because their decision to vote to accept the plan was pursuant to the RSA, and therefore impermissibly solicited without a court-approved disclosure statement.

Judge Brendan L. Shannon disagreed. In denying the objectors’ motion, the court observed that “the filing of a Chapter 11 petition is an invitation to negotiate.” Indianapolis Downs at 297. “When a deal is negotiated in good faith between a debtor and sophisticated parties, and that arrangement is memorialized in a written commitment and promptly disclosed, [the solicitation requirements of Section 1126 of the Bankruptcy Code] … will not automatically require designation of the votes of the participants.” Id.

Judge Shannon reviewed binding precedent in the U.S. Court of Appeals for the Third Circuit, including In re Century Glove, 860 F.2d 94 (3d Cir. 1988), which recognized the importance of negotiations to the success of a Chapter 11 reorganization and, based on this precedent, construed formal “solicitation” narrowly. He distinguished earlier Delaware bankruptcy decisions questioning the propriety of RSAs in the context of prepackages solicitations. Indianapolis Downs at 295. Judge Shannon acknowledged the importance of dealmaking in the Chapter 11 context as well as the “critical” nature of a creditor’s ability to vote on a proposed restructuring. As a result, the Indianapolis Downs ruling validates the use of a post-petition RSA as an important tool to forge consensus on a Chapter 11 reorganization plan.

Fee and Expense Reimbursements. The decision also ruled against the assertion that RSA-required reimbursement of legal fees and expenses of RSA parties allowed these parties to receive better treatment on their claims than those afforded to other creditors. Judge Shannon approved the reimbursements, agreeing with the debtors that such reimbursements were separate and distinct from payment on the creditors’ claims (so there was no disparate treatment of similar claims under the plan), and by finding that such reimbursement was a necessary administrative expense that preserved the bankruptcy estate. Id. at 301 (citing 11 U.S.C. § 503(b)(1)(A)).

Third-Party Releases. The Indianapolis Downs plan objectors challenged proposed third-party release terms of the debtors’ plan. Specifically, the plan provided that certain nondebtors would be released (or deemed released) from possible claims against them that might be held or asserted by certain categories of creditors. This includes creditors that (i) voted on the plan but did not “opt out” of the release, (ii) were not impaired by the plan and (iii) did not vote on the plan but did not “opt out” of the releases (by, for instance, failing to return a ballot at all). The plan objectors, including the Office of the United States Trustee, argued that such third-party releases were permissible only if creditors had consented or creditors in the latter two categories had taken insufficient steps to evidence such consent.

The court overruled the objections to the third-party release terms of the plan by following the ruling in In re Spansion, 426 B.R. 114 (Bankr. D. Del. 2010) that “returning a ballot is not essential to demonstrating consent to a release.” Judge Shannon indicated a “more flexible approach” was warranted. Indianapolis Downs at 305. He emphasized that unimpaired creditors had received consideration for the releases and that creditors who elected not to vote at all had received “detailed instructions” on the opt-out procedure and had elected not to pursue it. Id. at 306. In doing so, he decided that the plan’s third-party release terms were supported by creditor consents.


The Indianapolis Downs decision articulates clearer standards of approval for entering into an RSA after the commencement of a Chapter 11 case as well as providing for creditor releases of nondebtor third parties through plan terms.

Notably, the Indianapolis Downs RSA differed from those at issue in the earlier Delaware bankruptcy court decisions (Stations Holding and NII Holdings) that questioned the propriety of RSAs. In those cases, the agreements did not provide creditors who signed a post-petition RSA with the opportunity to vote against the contemplated plan, even if the disclosure statement ultimately approved by the court contained materially different information than what the creditors had available at the time they executed the RSA.

In contrast, the Indianapolis Downs RSA contained detailed default provisions permitting creditors to terminate that RSA if the debtors’ representations to signatory creditors proved false or events changed materially. It follows that the presence (or absence) of such creditor-friendly RSA provisions may be important to judicial scrutiny and approval (or not) of post-petition RSAs and similar Chapter 11 lock-up agreements.


1 See In re Stations Holding Co,. Inc., 2004 WL 1857116 (Bankr. D. Del. Aug. 18, 2004); In re NII Holdings, Inc., 288 B.R. 356 (Bankr. D. Del. 2002).

2 Section 1125(b) of the Bankruptcy Code provides that acceptance or rejection of a plan may not be solicited post-petition unless a written disclosure statement approved by the bankruptcy court as containing “adequate information” is transmitted at the time of the solicitation. 11 U.S.C. §1125(b). “Adequate information” is defined in Section 1125(a) as information that would enable a hypothetical investor to make an informed judgment regarding a plan of reorganization. 11 U.S.C. §1125(a).

Download PDF

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Skadden, Arps, Slate, Meagher & Flom LLP | Attorney Advertising

Written by:

Skadden, Arps, Slate, Meagher & Flom LLP

Skadden, Arps, Slate, Meagher & Flom LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.